Incentives

Feb 9, 2011 | Funny / Interesting, Incentives, Videos

This is a less serious video this week.

It’s about incentives.

I tell a story about a friend who has a $75,000 a year meal & entertainment budget, but the negative incentives put upon him by his accounting department have some unintended consequences.

In evaluating an investment, public or private, be sure you think about the managers, organizers, and CEOs to ensure their goals are aligned with yours and with the right supportive incentives.

Take 2.5 minutes to watch/listen to my video

 

TRANSCRIPT:

Hi Clients and Friends, Mike Brady here. I just got done with the detailed video of “Vix” (Volatility Indexes) from last week, and if you haven’t seen it, go ahead and click on my archives and watch last week’s video, kind of a more technical, showing more graphs on Vix, which is volatility indexes.

I just have a funny story that I wanted to share, I just wanted to share it with you because I think it is funny. It’s about incentives. I’ve got a buddy who is a salesman for a company and we go out for a beer. And he has two beers and I have two beers over a couple of hours and ready to pay the bill and he’s like “no Mike, let me take the bill.” And I’m like, “Oh, OK.” He’s like, “Mike order some food, take it home for your wife!” I’m like, “I’m not going to take any food home for…, you know, I don’t need to take advantage of you like that.”

He’s like “No, no, no Mike, you don’t understand. I have a $75,000.00, a year meal and entertainment budget. And if I submit this bill with our beers on there without food, I’m not going to get reimbursed.” I’m like, “OK.” He’s like, “…so order food for yourself, order food for your wife because if you don’t do it, I’m going to have to order, I’m going to have to pick a table here and buy the people food.” I’m like, “OK, wow, I can’t believe that.” I order some food.

And he’s like, “yeah.” He goes “Next they’re going to start looking at the ratio of food to alcohol to insure that it is the right ratio.” And I’m like, “wow, that seems extreme.” He’s like “and Mike, if I don’t spend the entire $75,000.00, a year, they’re going to take it off my, the difference between what I spend and what I have to spend, they’re going to take it out of my bonus.” He goes, “so here I am, all I want to do is spend $10 or $12 on a few beers with a buddy, and instead I’m forced to spend $30, $40, $50 just so I can get reimbursed!” He goes, “What kind of an incentive is that?”

And so, I think that is a really interesting, disturbing, but interesting story about making sure you have the right incentives. And from an investment point of view, of course, it is make sure that the people who are either proposing a project, or working in the project, or managing the project, whatever it might be, the investment, whether it is private investment or public investment, doesn’t matter, make sure that their incentives are aligned with the positive outcome that you want- both for the project and, of course, for your particular investment.

Anyway, I was just thinking about that and wanted to share it with you. And so that’s this week’s video. You have a wonderful week.

I’m a registered representative with Cambridge Investment Research. My company is Generosity, let’s see if I can get out here, Generosity Wealth Management in Boulder, CO. 303.747.6455. A little bit lighter video for this week but I’ll try to get something more technical next week. You have a wonderful, wonderful time, bye bye.

Generosity Wealth Management in Boulder, CO

 

TARP cost Estimate Cut to $25 billion?

Dec 2, 2010 | Incentives, Taxes

It's a TARP - Get it?

Finally a government program with cost estimates LESS than projected.

The $700 billion Troubled Asset Relief Program is estimated by the CBO to come in at $25 billion dollars.

At the time, if you remember, it was billed as a gift and we were out the money. However, due to repayments and other fortunate events, most of the money allocated has either not been used or has been repaid.

AIG and the auto industry are costing about $45 billion whereas the other aspects are giving the taxpayers $20 billion of profit, for a net of $25 billion cost.

 CLICK FOR FULL ARTICLE: TARP COST

Unintended Consequences

Nov 11, 2010 | Behavioral Finance, Incentives

There is an interesting study that says states that ban texting while driving actually have rising accident claims.

Why? They theorize that drivers try to evade police by lowering their phones when texting, which increases the risk by taking their eyes even further from the road and for a longer time.

Why do I bring this up? Because the unintended consequences of every action should be taken into consideration.

A good think to remember when we’re talking about economic policies–monetary or fiscal.

CLICK FOR FULL ARTICLE – CRASH INTO ME

 

What’s Worse: Losing Money or Not Making Enough?

Oct 6, 2010 | Behavioral Finance, Incentives, Personal Finance

It’s the old adage — Greed and Fear.

Is the pain of losing money greater than the joy of making money?

The problem is that most people NEED to take some risk to realize their retirement goals because the rate of return needed is greater than the risk free return.

With inflation, there’s opportunity cost as well.

One of the things I do for clients is work with them to balance these competing desires of growth and principal protection. Call me if you’d like to discuss this in your situation.

Click on the link for a discussion of which is worse–Losing Money or Not Making Enough.